Mb131 - 2004 - 04 (april)

Question Paper Financial Accounting (MB131) : April 2004 • • • 1.

Section A : Basic Concepts (100 Marks) This section consists of questions with serial number 1 - 73. Answer all questions. Each question carries one mark.

Which of the following appears under the head ‘Miscellaneous expenditure’ on the assets side of Balance Sheet of a company? (a) Bills discounted from bank (c) Directors’ remuneration (e) Income tax paid in advance.

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(b) Prepaid insurance (d) Discount allowed on issue of shares (1 mark)

2.

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Dividends are usually paid on (a) Authorized capital (c) Called-up capital (d) Paid-up capital

(b) Issued capital (e) Reserve capital. (1 mark)

3.

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Which of the following can be utilized for redemption of preference shares? (a) (b) (c) (d) (e)

The proceeds from fresh issue of equity shares The proceeds from issue of debentures The proceeds from issue of fixed deposit The sale proceeds of investments Both (a) and (b) above. (1 mark)

4.

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Which of the following costs is not categorized as Research and Development Costs? (a) (b) (c) (d)

Cost of materials consumed in the process of research and development Amortization of patents and licenses related to research and development Depreciation of premises that is used for carrying the work of research Salaries and wages paid to personnel engaged in the research and development activities

(e)

Promotional expenses on market research for existing products. (1 mark)

5.

The maximum amount beyond which a company is not allowed to raise funds by issue of shares is (a) Issued capital (c) Nominal capital (e) Paid-up capital.

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(b) Reserve capital (d) Subscribed capital (1 mark)

6.

According to which of the following accounting concepts, are consolidated financial statements prepared when a parent-subsidiary relationship exists? (a) Going concern

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(b) Business entity (c) Materiality (d) Cost (e) Periodicity. (1 mark)

7.

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Rights shares are the shares (a) Issued by a newly formed company (c) Offered to the existing equity shareholders (e) That have a right to cumulative dividends.

(b) Legally issued to the public at large (d) That have a right of redemption (1 mark)

8.

Which of the following data is essential for calculation of value of an equity share under the intrinsic value method?

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(a) Normal rate of return (c) Market value per share (e) Net equity.

(b) Expected rate of return (d) Dividend per share (1 mark)

9.

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Premium on redemption of debentures account is (a) A real account (d) An asset

(b) A nominal account

(c) A personal account (e) A capital reserve. (1 mark)

10.

The maximum rate of discount that is allowed as per the provisions of the Companies Act in the event of a company issuing shares at a discount is (a) 5% 15%.

(b)

8%

(c)

10%

(d)

12%

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(e) (1 mark)

11.

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The trade discount on purchases is recorded (a) When it is received (c) When the inventory is sold (e) Not at all recorded in the books.

(b) When the inventory is purchased (d) When the inventory is returned (1 mark)

12.

In a funds flow statement prepared on working capital basis, a short term loan repaid by the organization (a) (b) (c) (d) (e)

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Is shown as a source of working capital Is shown as an increase in cash Is shown as a decrease in cash Does not affect the working capital Is not shown either as a source or a use of funds. (1 mark)

13.

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Which of the following is a leverage ratio? (a) Debt-Equity ratio (b) Current ratio (c) Quick ratio (e) Inventory turnover ratio.

(d)

Earning power (1 mark)

14.

The document inviting offers from public to subscribe for the debentures or shares of a body corporate is a (a) Share certificate (e) Share Warrant.

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(b) Debenture (c) Fixed deposit receipt (d) Prospectus (1 mark)

15.

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Which of the following is not an asset? (a) Stock of stationery (c) Profit and loss account (credit balance) (e) Cash at bank.

(b) Goodwill (d) Accounts Receivable (1 mark)

16.

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The portion of the acquisition cost of an asset yet to be allocated is known as (a) (c) (e)

Written down value Realisable value Residual value.

(b) Accumulated value (d) Salvage value (1 mark)

17.

Which of the following items is/are covered under Accounting Standard-2 with regard to accounting for inventory? I.

Financial instruments held as stock-in-trade

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II. Work in progress arising under construction contracts III. Work in progress of service providers IV. Work in progress of a manufacturing industry. (a) Only (I) above (c) Both (I) and (II) above (e) (II), (III) and (IV) above.

(b) Only (IV) above (d) Both (III) and (IV) above (1 mark)

18.

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Which of the following statements is/are true? I. Drawings account is a nominal account II. Capital account is a real account III. Prepaid rent is a personal account IV. Outstanding salaries account is a nominal account V. Patents account is a personal account. (a) Only (I) above (b) Only (III) above (c) Both (II) and (IV) above (e) (I), (II), (III) and (IV) above.

(d) (II), (IV) and (V) above (1 mark)

19.

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Which of the following events is/are not recorded in the books of a business? (a) (b) (c) (d) (e)

Significant monetary events after the balance sheet date Death of a chief executive of the business Government investigations into the pricing policies of the business Both (b) and (c) above (a), (b) and (c) above. (1 mark)

20.

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Which of the following appears in the profit & loss appropriation account? (a) Interest on debentures (d) Provision for bad debts

(b) Dividend (c) Provision for taxation (e) Penalty paid for defective works. (1 mark)

21.

Which of the following inventory valuation methods shows higher profits during the period of rising prices? (a) FIFO method (c) Weighted average method (e) Specific identification method.

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(b) LIFO method (d) Simple average method (1 mark)

22.

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At the time of preparation of final accounts, bad debts recovered account will be transferred to (a) Debtor’s account (b) Profit & loss account (c) Profit & loss adjustment account (d) Profit & loss appropriation account (e) Provision for discount on debtors account. (1 mark)

23.

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Which of the following is not an intangible asset? (a) Goodwill (e) Secret process.

(b) Trade mark

(c) Franchise

(d) Accounts receivable (1 mark)

24.

If machinery account is debited with the amount of repairs incurred on the machine, this is an example of (a) Compensating error (d) Error of omission

(b) Error of principle (e) Error of partial omission.

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(c) Error of commission (1 mark)

25.

If the opening inventory of a business is undercast, it will

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(a) (b) (c) (d) (e)

Increase gross profit and decrease net profit Decrease gross profit as well as net profit Increase value of assets Increase gross profit as well as net profit Decrease value of assets. (1 mark)

26.

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Which of the following is not a financial statement? (a) Profit and loss account (c) Balance sheet (e) Trial Balance.

(b) Profit and loss appropriation account (d) Funds flow statement (1 mark)

27.

Based on which of the following concepts, is share capital account shown on the liabilities side of a balance sheet?

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(a) Business entity concept (b) Money measurement concept (c) Duality concept (d) Going concern concept (e) Matching concept. (1 mark) 28.

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Which of the following is a liability of a firm? (a) (b) (c) (d) (e)

Debit balance of analytical petty cash book Credit balance of bank pass book Debit balance of bank column of cash book Debit balance of cash column of cash book Credit balance of bank column of cash book. (1 mark)

29.

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Which of the following statements is true? (a) (b) (c) (d) (e)

Inventory valuation affects only the income statement Undercasting or overcasting of subsidiary book is an example of error of commission Capital expenditure wrongly treated as revenue is an example of error of commission The sum total of assets is equal to the sum total of outside liabilities Inventories should be valued at lower of historical cost and current replacement cost. (1 mark)

30.

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Provision for bad debts is made as per the (a) Conservatism concept (c) Consistency concept (e) Time period concept.

(b) Cost concept (d) Going concern concept (1 mark)

31.

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Purchase of fixed assets on credit is originally recorded in (a) Purchases book (c) Cash book (d) Journal proper (e) Both (b) and (d) above.

(b) Ledger

(1 mark) 32.

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Double entry book keeping involves (a) (b) (c) (d) (e)

Two accounts being affected for each transaction which are equal and opposite to one another Two sets of books being kept for the business Business book-keeping being kept by more than one person Every entry in the business books being checked twice Every transaction is recorded once in the journal and again in the ledger. (1 mark)

33.

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Which of the following are current assets of a business? I.

Income received in advance

II.

Stock

III. Debtors V. Accrued income. (a) Both (I) and (IV) above (c) (I), (II) and (III) above (e) (I), (II), (III) and (IV) above.

IV. Pre-paid expenses (b) Both (II) and (III) above (d) (II), (III), (IV) and (V) above (1 mark)

34.

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The excess price received over the par value of shares should be credited to (a) Calls-in-advance account (c) Reserve capital account (e) Share allotment account.

(b) Share capital account (d) Share premium account (1 mark)

35.

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The claims against the company not acknowledged as debts are shown as (a) Current liabilities (c) Notes to balance sheet (e) No separate disclosure is required.

(b) Loans and advances (d) Directors’ report (1 mark)

36.

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The amount of any transaction incorrectly recorded, either wholly or partly, is (a) Error of omission (c) Error of principle (e) Error of computation.

(b) Error of commission (d) Compensating error (1 mark)

37.

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The discount allowed on re-issue of forfeited shares is debited to (a) General reserve account (c) Revaluation reserve account (e) Forfeited shares account.

(b) Capital reserve account (d) Capital redemption reserve account (1 mark)

38.

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Under cash basis of accounting, revenue is recognized when (a) Sale is made (c) Goods are delivered (e) Both (a) and (d) above.

(b) Cash is received (d) Services are rendered (1 mark)

39.

Which of the following factors is used as a multiplier of super profits in valuation of goodwill of a business? (a) Average capital employed in the business (c) Number of years’ purchase (e) Normal profits.

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(b) Simple profits (d) Normal rate of return (1 mark)

40.

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Declared dividend should be classified in the Balance Sheet as a (a) Provision (b) Current liability (c) Reserve (d) Current asset (e) Miscellaneous expenditure. (1 mark)

41.

ESS Ltd. issued 2,000, 10% debentures at the rate of Rs.100 each during the year 2000–2001. Interest on debentures is payable half yearly on September 30 and March 31 every year. The company has power to purchase its own 10% debentures in the open market for cancellation. The following purchases were made during the year 2003–2004: Only July 01, 2003 On December 01, 2003 interest.

400 of its own 10% debentures at the rate of Rs.96 ex-interest. 300 of its own 10% debentures at the rate of Rs.102 cum-

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The total amount debited to own debenture investment account was (a) Rs.70,000 (b) Rs.68,500 (c) Rs.69,000 Rs.71,600.

(d) Rs.70,600

(e) (2 marks)

42.Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10/- each at a premium of Rs.2 per share. The entire issue was underwritten by three underwriters in the following percentages: Anil Vimal Sunil The details of marked and unmarked applications received are: Marked applications of Anil Vimal Sunil Unmarked applications

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30% 40% 30% 22,000 shares 24,000 shares 28,000 shares 16,000 shares

The final liability of Vimal in terms of number of shares is (a) Nil 8,000.

(b) 9,600

(c) 3,200

(d) 16,000

(e) (2 marks)

43.

Sonic Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount was payable as: On application On allotment (including premium) On first call On second and final call

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Rs.2 Rs.5 Rs.3 Rs.2

Applications were received for 9,500 shares and the shares were allotted to applicants in full. Vikas, who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were re-issued @ Rs.9 per share. The amount transferred to capital reserve is . (a) Rs.200 (b) Rs.1,000 (c) Rs.800 (d) Rs.1,300 (e) Rs.1,200 (2 marks) 44.

The issued capital of Marval Ltd. is Rs.12,00,000 divided into 1,20,000 shares which were issued at a premium of 100%. The company offers two shares for every three shares held to its existing shareholders. If the rights issue price is Rs.410 per share and the market value at the time of rights issue is Rs.560 per share, the value of right is (a) Rs.60 Rs.560.

(b) Rs.20

(c) Rs.150

(d) Rs.410

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(e) (1 mark)

45.

AVON Ltd. purchased a machinery in exchange of its debentures. The machinery was installed on March 31, 2003. The value of securities exchanged is Rs.1,85,000. It is expected that the machinery will have a useful life of 10 years after which it will have a salvage value of Rs.5,000. The machinery was put to use with effect from April 01, 2003. The company follows straight line method of depreciation, the amount of depreciation charged for the year 2003-04 is (a) Rs.18,000 Rs.17,500.

(b) Rs.20,500

(c) Rs.15,500

(d) Rs.15,000

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(e)

(1 mark) 46.

While finalizing the accounts of M/s. Novelty India for the year ended March 31, 2004, the following errors were noticed: Salaries overstated

Rs.15,000

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Repairs understated Income from investments understated

Rs. 7,000 Rs. 7,000

The impact of the above errors on the net profit is (a) Overstatement of Rs.22,000 (c) Understatement of Rs.15,000 (e) Overstatement of Rs. 7,000.

(b) Understatement of Rs.22,000 (d) Understatement of Rs. 7,000 (1 mark)

47.

As on March 31, 2004, the favourable balance of Mr.Prahlad as per bank pass book is Rs.20,000. The pass book balance did not agree with the balance as per cash book. On scrutiny, the following omissions and commissions were noticed:

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A cheque for Rs.4,000 issued to Mr.Pramod has not been presented for payment till • date. • Mr.Jeevan, a tenant, directly deposited into the bank account an amount of Rs.10,000 towards rent and the same is not accounted in the cash book. • A cheque for Rs.15,000 deposited in the bank is not yet realized. • The interest on debentures for this year, directly collected by the bank, amounted to Rs.10,000 and the same is not accounted in the cash book. The bank balance as per cash book is (a) Debit balance of Rs.11,000 (b) Credit balance of Rs.11,000 (c) Credit balance of Rs.20,000 (d) Debit balance of Rs. 40,000 (e) Debit balance of Rs.19,000. (2 marks) 48.

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Consider the following information pertaining to Xylofone Ltd.: On April 01, 2003, the Provision for bad debts account showed a credit balance of Rs.30,000. As on March 31, 2004, the status of the following debtors is •

Mr. A had become insolvent and only 40 paise in a rupee is expected to be realized out of his estate in full settlement. He owed a total amount of Rs.20,000

•

Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood that no amount will be recovered from him.

•

Mr. C has agreed to pay Rs.3,000 as final settlement against his due of Rs.10,000 and the balance is irrecoverable. If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount to be debited to Profit and loss account for the year ending March 31, 2004, after considering the above, is (a) Rs. 34,000 64,000.

(b) Rs. 29,000

(c) Rs. 26,000

(d) Rs. 35,000 (e) Rs. (2 marks)

49.

On April 01, 2002, Ray Ltd. purchased furniture for Rs.60,000. The book value of the furniture on March 31, 2004 is Rs.43,350. If the company charges depreciation on furniture under written down value method, the rate of depreciation is (a) 35% 15%.

(b) 30%

(c) 25%

(d) 20%

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(e) (1 mark)

50.

M/s.Pie Company, a dealer in herbal creams records its stock under First-in-First-out method, so as to minimize accumulation of outdated stock. The opening stock as on March 01, 2004 is 150 units at the rate of Rs.20 per unit. The purchases and sales made during the month are: Purchases: Date 04-03-2004 14-03-2004

No. of units 200 100

Cost price per unit Rs.25 Rs.22

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21-03-2004 26-03-2004

300 150

Rs.30 Rs.40

Sales: Date No. of units 03-03-2004 100 10-03-2004 150 15-03-2004 100 25-03-2004 200 28-03-2004 200 Closing stock of the company as on March 31, 2004 is (a) Rs.1,500 (b) Rs.6,000 (c) Rs.3,000 (d) Rs.4,500 Rs.7,500.

(e) (2 marks)

Consider the following data pertaining to Mr. Krishnan for the year ended March 31, 2004, and answer Question No.s 51 and 52 Trial Balance as on March 31, 2004 Particulars

Rs. 4,000 4,50,000 30,000 10,000 5,000 1,000 5,500 23,800 10,000 10,000 500 1,25,500 35,000 60,000 200 7,70,500

Insurance Purchases Opening stock Salaries and wages Rent paid Insurance Prepaid Freight inward Cash on hand Returns inward Closing stock Managerial commission Fixed Assets Sundry debtors Land Bad debts Total

Particulars Sales Returns outward Capital Sundry creditors

Rs. 5,10,000 15,000 2,00,000 45,500

Total

7,70,500

Additional information: ‰ Depreciate the fixed assets at the rate of 10% per annum. Make a provision for bad and doubtful debts at the rate 5% on debtors.

51.

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The net profit/loss of Mr. Krishnan for the year ending March 31, 2004 is (a) Rs.4,500(loss) (e) Rs.6,500 (profit).

(b) Rs.3,500 (profit)

(c) Rs.4,300 (loss)

(d) Rs14,500 (loss) (3 marks)

52.

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The total of Balance Sheet of Mr.Krishnan as on March 31, 2004 is (a) Rs.2,30,000 Rs.2,30,800.

(b) Rs.2,41,000

(c) Rs.2,51,000

(d) Rs.2,46,500

(e) (2 marks)

53.

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Consider the following data pertaining to XLNT Ltd.

i.

Original cost of furniture (Rs.)

5,000

ii. iii.

Rate of depreciation under written down value method (%) Residual value of furniture at the end of useful life (Rs.)

20 2,048

The estimated useful life of the furniture is (a) 3 years years.

(b) 4 years

(c) 5 years

(d) 6 years

(e) 7 (1 mark)

54.

Kohinoor Ltd. started its operations on April 15, 2003. Consider the following data pertaining to the company for the year 2003-2004: Particulars

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Rs.

Cash Sales

6,80,000

Credit Sales

1,20,000

Bad debts written off

2,000

Issue of shares for cash

5,00,000

Purchase of fixed assets for cash

4,00,000

Depreciation

40,000

Amount received from bank by way of short-term loan

1,00,000

Short-term loan repaid during the year

25,000

Manufacturing and administrative expenses paid

3,50,000

Cash Purchases

1,50,000

Credit purchases

2,90,000

Amount deposited in bank The balance of cash as on March 31, 2004 is (a) Rs.1,15,000 (b) Rs.1,55,000 (c) Rs.1,13,000 (d) Rs.2,75,000

2,00,000 (e) Rs.2,33,000. (2 marks)

55.

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Consider the following data pertaining to Dhamaka Ltd.: The company has issued 10,000 shares of Rs.100 each at a premium of Rs.15. M/s Underwriters & Brokers have taken 100 percent underwriting at a percentage of maximum allowable commission under the Companies Act, 1956. The applications were received for 10,000 shares and allotment was made in full. The commission payable to M/s Underwriters & Brokers is (a) Rs.10,000 Rs.28,750.

(b) Rs.57,500

(c) Rs.50,000

(d) Rs.25,000

(e) (2 marks)

56.

In the books of Pyramid Ltd. goods worth Rs.7,850 returned by Mr. Prakash were entered in the returns inward day book. Therefrom, the inexperienced accountant posted the amount to the debit of Mr.Prakash account. At the time of preparation of trial balance, the difference in books was placed to suspense account. The entry to be passed to rectify the mistake is Rs. Rs. (a) Returns inward account Dr. 7,850 To Suspense account 7,850 (b) Returns inward account Dr. 7,850 To Prakash account 7,850 (c) Suspense account 15,700 Dr.

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(d) (e)

To Prakash account Returns inward account Dr. To Prakash account Prakash account To Suspense account

15,700 15,700 15,700 Dr.

15,700 15,700. (2 marks)

57.

On March 31, 2004, the bank column of cash book of Sree Ltd. showed an overdraft balance of Rs.3,400 and this balance did not agree with the balance as per bank pass book. On verification, the following facts were noticed: i.

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An outstation cheque for Rs.6,300 deposited in the bank on March 28, 2004 was not collected by the bank till March 31, 2004. ii.

Bank charges amounting to Rs.120 and interest charges amounting to Rs.790 were not recorded in the cash book.

iii. Cheques issued amounting to Rs.5,650 were not presented for payment as on March 31, 2004. iv. Interest on investment of Rs.5,200 collected by the banker appeared only in the bank statement. The bank balance as per pass book as on March 31, 2004 was (a) Rs. 2,060 (debit) (c) Rs.10,160 (debit) (b) Rs. 2,060 (credit) (d) Rs. 240 (credit) (e) Rs. 240 (debit). (2 marks) 58.

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Consider the following particulars pertaining to the sole proprietor business of Mr. Katyal: Particulars

As on April 01, 2003 (Rs.)

As on March 31, 2004 (Rs.)

Capital

3,40,000

?

Loan from bank

1,85,000

1,20,000

Sundry creditors

25,000

40,000

Fixed assets

2,70,000

2,45,000

Inventory

1,50,000

1,85,000

Sundry debtors

70,000

95,000

Cash and bank

60,000

80,000

The profit for the year 2003-2004 was (a) Rs.4,45,000 Rs. 85,000

(b) Rs. 65,000

(c) Rs. 30,000

(d) Rs. 1,05,000

(e) (2 marks)

59.

VNL Enterprises, which started its operations on April 01, 2003, provided the following untallied Trial Balance as on March 31, 2004: Particulars Sales

Rs. 5,65,000

Carriage inward

28,000

Other expenses

31,000

Fixed assets Sundry debtors

10,90,000 1,25,000

Sundry creditors

95,000

Cash and bank

65,000

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Capital

9,00,000

On verification, it was noticed that the difference in trial balance is on account of omission of purchases. If the value of stock as on March 31, 2004 was Rs. 50,000, the gross profit for the year 20032004 was (a) Rs.3,66,000 Rs.6,15,000.

(b) Rs.3,94,000

(c) Rs.3,48,000

(d) Rs.2,08,000

(e) (2 marks)

60.

The total of debit side of trial balance of M&M Company is Rs.2,45,000 and that of the credit side is excess by Rs.2,68,900. Subsequently the following mistakes are discovered. Correct Amount (Rs.)

Particulars

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Amount which appears in trial balance (Rs.)

Opening stock

40,500

40,600

Advertisement expenses

15,000

15,000 (credit side)

Interest from investments

6,000

Omitted

The total of the corrected trial balance is (a) Rs.2,60,100 Rs.2,51,100.

(b) Rs.2,59,900

(c) Rs.2,30,100

(d) Rs.2,65,900

(e)

(2 marks) 61.

M/s.Saketha Enterprises introduced the imprest system of petty cash book, the amount of imprest being Rs.1,000. The petty cash transactions during the month of March 2004 are as under: Particulars

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Amount (Rs.)

Stamps

145

Conveyance

186

Repairs

228

Stationery

154

Other office expenses

93

The amount of cash received on April 01, 2004 to make up the imprest balance is (a) Rs.578 Rs.1,000.

(b) Rs.194

(c) Rs.806

(d) Rs.422

(e) (1 mark)

62.

Brijesh Ltd. issued 10,000 equity shares of Rs.100 each at a premium of Rs.20 payable as follows: On application

Rs.30

On allotment

Rs.50 (inclusive of premium)

On first call

Rs.20

On final call

Rs.20

Applications were received for 10,500 shares. The company rejected the excess applications for 500 shares and the balance were allotted in full. The company forfeited 500 shares of Mrs. Mithili for non-payment of first call of Rs.20 per share after making the second call. On forfeiture, the Share Capital account will be (a) Debited by Rs.60,000 (c) Debited by Rs.50,000 (e) Debited by Rs.35,000.

(b) Credited by Rs.10,000 (d) Credited by Rs.50,000 (2 marks)

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63.

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Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004: Particulars Opening stock

Amount (Rs.) 90,000

Sales Purchases

6,35,000 4,56,000

Salaries

86,000

Other expenses

73,000

Fixed assets Sundry debtors

5,00,000 45,000

Sundry creditors Cash and bank

Amount (Rs.)

32,000 53,000

Share capital

6,00,000

Short term loan

36,000 13,03,000

13,03,000

The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of charging depreciation on the fixed assets at the rate of 15% on written down value method. The total of liabilities side of Balance Sheet as on March 31, 2004 is (a) Rs.7,38,000 Rs.7,43,000.

(b) Rs.6,68,000

(c) Rs.6,73,000

(d) Rs.5,93,000

(e) (3 marks)

64.

In the year 2003- 2004, Ross Ltd. imported a new machine and made the following payments in relation to it: Cost as per supplier’s list Rs.5,20,000 Rs.4,70,000 Less: Agreed discount Rs. 50,000 Delivery charges Erection charges Annual maintenance charges paid for the period 2003-04 Customs duty Annual insurance premium

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10,000 20,000 30,000 40,000 5,000

The cost of the machine is (a) Rs.5,40,000 Rs.5,70,000.

(b) Rs.5,45,000

(c) Rs.4,70,000

(d) Rs.5,50,000

(e) (1 mark)

65.

The following Trial Balance pertaining to John Vicky as on March 31, 2004 was prepared by an inexperienced accountant: Trial Balance of John Vicky as at March 31, 2004 Debit Credit Particulars (Rs.) (Rs.) 89,000 Capital (1st April, 2003) Drawings 10,000 37,000 Stock (1st April, 2003) Purchases 2,31,250 Sales 3,94,000 Motor vehicles 14,500 Cash in hand 1,350 Sundry creditors 49,760 Sundry debtors 1,39,700

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Bank overdraft Administrative expenses Office equipment Carriage outward Returns inward Provision for bad debts Returns outward Discount allowed Discount received Total

9,000 76,360 35,000 2,310 2,050 4,250 3,160 2,800 3,150 5,52,320

5,52,320

Though, the Trial Balance has tallied, it has certain errors which were subsequently rectified. The total of corrected Trial Balance as on March 31, 2004 is (a) Rs.5,52,320 Rs.5,03,440.

(b) Rs.4,64,200

(c) Rs.5,55,510

(d) Rs.5,43,200

(e) (2 marks)

66.

Consider the following data pertaining to Leo Ltd.: Profit for 2001-2002 Profit for 2002-2003 Profit for 2003-2004 Normal rate of return Capital employed The super profit of the company is (a) Rs.50,000 Rs.18,000.

(b) Rs.42,000

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Rs. 4,38,000 Rs. 4,62,000 Rs. 4,50,000 12% Rs.35,00,000

(c) Rs.40,000

(d) Rs.30,000

(e) (2 marks)

67.

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Consider the following data pertaining to Universe Ltd. as on March 31, 2004: ƒ ƒ ƒ ƒ

Total sundry debtors as per Trial Balance Rs.40,600 Bad debts identified after the preparation of Trial Balance Rs.600 Provision for bad debts to be created @ 5% on sundry debtors Provision for discount on sundry debtors to be created @ 2%.

The amount of provision for discount on sundry debtors to be created for the period ended March 31, 2004 is (a) Rs.760 Rs.812.

(b) Rs.2,000

(c) Rs.771

(d) Rs.800

(e) (2 marks)

68.

Consider the following data in respect of material traded by Success Ltd. during the month of March 2004:

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Opening stock as on March 01 2004 is 1,000 kg. @ Rs.20 per kg. Purchases Issues Date Quantity (Kg) Rate per Kg Rs. Quantity (Kg) March 10,2004 500 23.00 March 15, 2004 750 March 20, 2004 1000 26.25 March 31, 2004 750 On March 31, 2004, the value of stock held by the company under the Weighted Average Method is (a) Rs.23,083 (b) Rs.23,000 (c) Rs.24,000 (d) Rs.28,000 (e) Rs.26,250. (2 marks) 69.

Mr. Mohan sold goods to Mr. Raju for Rs.900. The catalogue price of the goods is Rs.1,000. Mr. Mohan also offered a further discount of Rs.50 for spot payment of cash. Mr. Raju took delivery of goods by paying cash.

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The journal entry to record the transaction in the books of Mr. Mohan is (a)

(b) (c) (d) (e)

Cash a/c. – Trade discount a/c. – Cash discount a/c. – To Sales a/c. Cash a/c. – Discount a/c. – To Sales a/c. Cash a/c. – Discount a/c. – To Sales a/c. Cash a/c. – To Sales a/c. Mr. Raju’s a/c. – To Sales a/c.

Dr. Rs.850 Dr. Rs.100 Dr. Rs. 50 Rs.1,000 Dr. Rs.850 Dr. Rs.150 Rs.1,000 Dr. Rs.850 Dr. Rs. 50 Rs. 900 Dr.

Rs.850

Dr.

Rs.850

Rs. 850 Rs. 850. (2 marks)

70.

H. Ltd. acquired 80% shares of S. Ltd. on October 01, 2003. At the time of acquisition, the plant and machinery of S. Ltd. was revalued by H. Ltd. at 20% above its book value of Rs.5,00,000. At the time of consolidation of Balance Sheet on March 31, 2004, the share of H. Ltd. in the profit on revaluation is (a) Rs.80,000 (Capital profit) (b) Rs.80,000 (Revenue profit) (c) Rs.40,000 (Capital profit) (d) Rs.40,000 (Revenue profit) (e) Rs.20,000 (Capital profit).

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(1 mark) 71.

For the year 2003-04, the directors of Anuhya Ltd. proposed a dividend of 19%. The capital structure of the company as on the date of proposal of dividend is :

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Rs. Authorised Capital

10,00,000

Issued and Called-up capital

8,00,000

Calls-in-arrear

10,000

Calls-in-advance

20,000

Securities Premium 80,000 If the profit for the year 2003-04 is Rs.2,25,000, the minimum amount of profits that will have to be compulsorily transferred to general reserve is (a) Rs.16,875 (b) Rs.11,250 (c) Rs.22,500 (d) Rs.1,52,000 (e) Rs.1,50,100. (2 marks) 72.

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Consider the following profits pertaining to Vennela Ltd. for the last 3 years: Year 1 2 3 The weighted average profit of the company is (a) Rs.4,50,000 Rs.3,50,000.

(b) Rs.4,35,000

(c) Rs.4,10,000

Rs. 3,30,000 4,20,000 4,80,000

(d) Rs.3,85,000

(e) (2 marks)

73.

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The following information is given about PS Ltd.: Inventories

Rs.4.0 lakhs

Sundry debtors Cash and Bank balances Short-term bank borrowings Accounts payable The quick ratio for the firm is (a) 5.45 (b) 3.75 1.56.

Rs.3.0 lakhs Rs.5.0 lakhs Rs.1.0 lakhs Rs.2.2 lakhs (c) 3.64

(d) 2.50

(e) (2 marks)

END OF SECTION B

Suggested Answers Financial Accounting (MB131) : April 2004 1.

2.

3.

4.

5.

6.

Answer : (d) Reason : Discount allowed on issue of shares appears under the head ‘miscellaneous expenditure’ on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appears under current assets of the balance sheet. Directors’ remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct. Answer : (d) Reason : Dividends may be termed as the share of profits that is payable to the shareholders of a company. The Companies Act lays down the do’s and don’ts associated with declaration/payment of dividends. As per the Companies Act, that dividends are paid on paid up capital which is part of the called up capital that has been paid up by the shareholders and made available with the company for utilization. Hence, it is proper to pay dividends on paid-up capital. Thus, alternative (d) is the correct answer. The other alternatives– (a) Authorized capital is the capital authorized to issue by its memorandum. It is only nominal in nature unless and until the entire amount is issued, called up and paid up. Since the entire amount is not made available for utility, dividends cannot be declared on authorized capital. (b) Issued capital is the part of nominal capital that is offered to the public for subscription and the entire amount is not available for claiming dividend. (c) Called-up capital is that part of the subscribed capital which has been called-up and cannot be a base for calculation of dividend. (e) Reserve capital is that part of uncalled capital, which is to be called up in the event of winding up of a company and under any circumstances, dividend cannot be declared on it. Thus, the statements (a), (b), (c) and (e) are not correct. Answer : (a) Reason : Preference shares are redeemed from the proceeds of fresh issue of shares. It cannot be redeemed out of the proceeds of issue of debentures, fixed deposit and the sale proceeds of investment. Hence, (a) is correct answer. Answer : (e) Reason : All costs incurred to maintain production or to promote sales of existing products are excluded from the research and development costs. Any routine or promotional costs of market research of existing products cannot be called as research and development costs. The cost of materials consumed in the process of research and development (a), amortization of patents and licenses related to research and development (b), depreciation of premises that is used for carrying the work of research (c), salaries and wages paid to personnel engaged in the research and development activities (d) can be considered as research and development expenses, and hence they are not the correct answers. Therefore, alternative (e) is the correct answer. Answer : (c) Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is called nominal capital or authorized capital (c). Thus, alternative (e) is the correct answer. The issued capital (a) is that part of the nominal capital issued to the public and subscribed capital (d) is that part of the issued capital which is subscribed by the public, Paid up capital (e) is the amount which is paid-up by the shareholders, and Reserve capital (b) is that capital which will be called-up only in case of liquidation. Therefore, alternative (c) is the correct answer. Answer : (b) Reason : Consolidated financial statements should reflect the economic activities of a business enterprise measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate but are treated as a single business enterprise in consolidated statements, in recognition of Business entity concept (b). The other concepts do not explain about consolidation of financial statements. The Going concern concept (a) assumes that the business entity will continue to operate or an indefinite period of time. Materiality concept (c) requires reporting the information that has a value significant enough to affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to

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provide the information about the economic activities of the business enterprise at regular intervals. It does not speak about consolidation of financial statements. Therefore, alternative (b) is the correct answer. 7.

8.

< TOP Answer : (c) > Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a newly formed company (a).They are not the shares issued to the public at large (b). They are issued only to the existing shareholders. It does not indicate the right of redemption of shares issue (d). These are not the shares with cumulative dividend right (e). Therefore, alternative (c) is the correct answer. < TOP Answer : (e) > Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a company and deducting therefrom all the liabilities and claims of preference shareholders and dividing the net assets by the number of shares. The value of net assets is nothing but the net equity. Therefore, the information regarding net equity is essential for calculating the value of equity share under intrinsic value method. Thus, alternative (e) is the correct answer.

Net equity Value per share = No.of shares 9.

10.

11.

12.

13.

14.

15.

16.

Answer : (c) Reason : Premium on redemption of debentures account represents the additional amount payable to debenture holders at the time of redemption of debentures and is a personal account. It is not an asset (d) and therefore it cannot be a real account (a). It is not a an expenditure for the current year and therefore it cannot be a nominal account (b). It is not a capital reserve (e). Thus, alternative (c) is the correct answer. Answer : (c) Reason : A company cannot issue shares at a discount except as provided in Section 79 of the Companies Act. According to the said section the maximum rate of discount at which the shares can be issued is 10%. If it exceeds 10%, an approval from the Company Law Board is required. These conditions are intended to ensure that the discount is not unreasonable. Answer : (e) Reason : A trade discount is not at all recorded in books of accounts (e). It will be reduced from the invoice price and the net amount after deducting the trade discount will be recorded as purchases. Thus, alternative (e) is the correct answer. when it is not recorded in the books at all, the other four alternatives are incorrect. Answer : (c) Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the correct answer. It is not a source of working capital. Therefore, alternative (a) is not the correct answer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the working capital (d) is also not a correct answer, since it is affecting the working capital. Is not shown either as a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is the correct answer. Answer : (a) Reason : Debt-Equity ratio is also called as leverage ratio. Thus, alternative (a) is the correct answer. Current ratio (b) and Quick ratio (c) are liquidity ratios and not leverage ratios. Earning power (d) and Inventory turnover ratio (e) are not leverage ratios. Therefore, alternative (a) is the correct answer. Answer : (d) Reason : A prospectus (d) means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares or debentures of a body corporate. Total capital of a company is divided into units of small denominations which are called as shares. Share certificate (a) is an ownership security. Debenture (b) is a formal document constituting acknowledgement of a debt given under the seal of the company. Fixed deposit receipt (c) is the acknowledgement of deposit of a certain sum of money repayable after a fixed tenure as per the contract and share warrant (e) is a financial instrument that gives the holder the right to acquire equity shares. Thus, alternatives (a), (b), (c) and (e) are not correct. (d) is the correct answer. Answer : (c) Reason : Stock of stationery (a), Goodwill (b), Accounts receivable (d) and cash at bank (e) are the assets and not the correct answers. Profit and loss account (credit balance) (c) is the amount belongs to the owner of the business and it is a liability to the business. Hence it is not an asset and (c) is the correct answer. Answer : (a)

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17.

18.

19.

20.

21.

22.

Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written down value (a) Accumulated value (b) is the value of a thing accumulated over a period of time and not the correct answer. Realizable value (c) is the value which can be realized in the event of sale and is not correct answer. Salvage value (d) is the value of an asset that remains as scrap value after its usage over a period of time and is not the correct answer. Residual value (e) is the value remaining as residue and is not the correct answer. Alternative (a) is the correct answer Answer : (b) Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to the statement, Work in progress of a manufacturing industry is covered. Thus, the alternative (b) is the correct answer. The items of inventory stated in other alternatives are not covered under AS-2 Financial instruments held as stock-in-trade, Work in progress arising under construction contracts and Work in progress of service providers. Hence, alternatives (a) reflecting statement (I); (c) combination of statements (I) and (II); alternative (d) combination of statements (III) and (IV) and alternative (e) combination of statements II, III and IV are incorrect. Answer : (b) Reason : Prepaid rent account is a personal account is the correct statement and alternative (b) is the correct answer. The alternative (a) is incorrect because drawings is not a nominal account and it is a personal account of the owner which indicates the value of money or goods withdrawn by him for personal consumption. The alternative (c) is incorrect because it is the combination of wrong statement (II) Capital account is a personal account and not a real account with statement (III), which is a correct statement. The alternative (d) is incorrect because the statement (IV) is incorrect as outstanding salaries is a representative personal account and not a nominal account and the statement (V) is incorrect as patents account is a real account and not personal account and the combination of (II), (IV) and (V) is not the correct answer. The alternative (e) is incorrect because the combination of one correct statement (III) with incorrect statements (I), (II) and (IV). Thus, the correct answer is (b). Answer : (d) Reason : In recognition of money measurement concept, the events and transactions which are of monetary in nature are recorded in the books of a business. The statement in alternative (b) i.e., death of a chief executive, though significant cannot be expressed in terms of money as such does not finds place in the books. The statement in alternative (c) the Government investigation into the pricing activities of the business does not involve any monetary treatment to be made as such does not find place in the books. Thus, the alternative (d) the combination of (b) and (c) is the correct answer. The significant monetary events after the balance sheet date (a) are to be recorded in the books of the business hence is not the correct answer. Alternative (e), i.e., combination of an incorrect answer and two correct answers is also not the correct answer. Thus, alternative (d) is the correct answer. Answer : (b) Reason : Interest on debentures, provision for taxation, provision for bad debts and penalty for defective works are charged to profit and loss account, it means these are all charged against profit. Dividend is the part of profit and not a charge against profit, so it appears in the profit & loss appropriation account. Answer : (a) Reason : FIFO method is based on the assumption that costs are charged against revenue in the order in which they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the units purchased last. If the prices are rising, goods are issued at lower price and closing stocks are valued at higher price. It will help to create more profit. Other inventory methods stated in Last in first out method (b), under this method, the last unit in the stock is the first unit to be out and the costs are charged against revenue in the reverse order of the FIFO method and during the periods of rising prices, the closing stock consists of stock with remote prices. Under Weighted average method (c), the stocks are valued with certain weights as per the movement of stocks and the prices are restated at every stage of purchase. Under simple average method (d) the stock procured at various prices is computed on the average price of the stock. Under specific identification method (e), the physical stock is verified on daily basis where the stock dealt is of high value Hence, (a) is true. Answer : (b) Reason : Bad debts recovered is a wind fall gain and it is transferred to profit and loss account at the time of preparation of final accounts. If provision for bad and doubtful account is maintained in the books of accounts it will be transferred to provision account and the balance if any in the provision account will be transferred to profit and loss account. It is recovery of bad debt written off and hence it is not transferred to debtor’s account. It is not transferred to profit and loss adjustment account. It is not an appropriation to be transferred to profit and loss appropriation account. Provision for discount on debtors is the account

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23.

24.

25.

26.

27.

28.

29.

created to record the discount allowed to debtors and not to record either the bad debts or bad debts recovered. Thus, the answer is (b). Answer : (d) Reason : An accounts receivable is not an intangible asset. It is the amount that the business has to receive from its debtors. The other assets mentioned in alternatives (a), (b), (c), and (e) i.e., goodwill, trademark, franchises and secret processes are intangible assets. Hence, the correct answer is (d). Answer : (b) Reason : Error of principle denotes wrong classification of expenditure or revenue. If a company pays for repairs on a machine, it should be debited to repairs account. If it is charged to machinery account, it is an error of principle. Compensating error (b) is the one where one error is compensated by another error or series of errors and the debit to machinery account on account of repairs is neither compensated by another error or by series of errors and hence it is incorrect. Error of commission (c) is incorrect because this is an error made in recording the amount involved in a transaction while journalizing or posting to ledger accounts. Error of omission may be partial or complete. Under complete omission, the recording of an entry is completely omitted and it is incorrect answer. Error of partial omission is result of omission one aspect of a transaction and it is not the correct answer (e). Thus, (b) is the correct answer. Answer : (d) Reason : If the opening inventory of a business was undercast it will increase the gross profit and net profit (d). The opening stock plus net purchases are the cost of goods sold for a given period and its understatement will result in increase in gross profit and ultimately increases net profit. The alternative (a) is incorrect because, the increase in gross profit as a result of understatement of opening stock will not decrease the net profit. The alternative (c) and (e) are incorrect because opening stock is not reflected in balance sheet of a business either to increase assets or decrease the value of assets. The alternative (b) is incorrect because the decrease in cost of goods sold will not decrease gross profit and net profit. Answer : (e) Reason : Trial Balance (e) is not a financial statement. It is a list of all accounts showing outstanding balances at the end of the accounting period. It helps in the preparation of financial statements. The Profit and Loss account (a); Profit and Loss appropriation account (b) Balance Sheet (c) and Funds flow statement (d) are the financial statements prepared by a business entity. Funds flow statement is categorized as one of the financial statements, but its preparation is not mandatory. Thus, (e) is the correct answer. Answer : (a) Reason : Share capital is the contribution made by the owner(s) and is regarded as a liability to the business in the nature of owner’s equity. The underlying feature for this treatment is the distinction between the owner(s) and that of the business owned by them. According to business entity concept whenever an owner brings capital into the business, the business in turn is deemed to owe the capital to the owner. As such the share capital account is treated as a liability to the business and shown under liabilities. The other concepts are not correct because (b) Money measurement concept explains that in financial accountancy, a record is made only of information that can be expressed in monetary terms and ignores other events, however significant they may be. It is silent about the treatment of share capital account. (c) Cost concept implies that in accounting all transactions are generally recorded at cost and not at market value. It does not explain why share capital account is to be treated as liability. (d) The Going concern concept assumes that the business entity will continue to operate or an indefinite period of time It does not deal with the treatment of share capital account. (e) Conservatism concept: The theme behind this principle is that recognition of revenue requires better evidence than recognition of expenses. It deals with revenues and expenses and not the share capital account. Answer : (e) Reason : The credit balance in bank column of cashbook (e) represents overdraft and it is a liability of a business. Thus, (e) is the correct answer. Debit balance of analytical petty cash book(a), Credit balance of bank pass book (b), debit balance of bank column of the Cashbook (c) and debit balance of cash column of the Cashbook (d) represent assets and therefore not the correct answers. Therefore, alternative (e) is the correct answer. Answer : (b) Reason : Under casting or over casting of subsidiary book is the example of error of commission. Hence (b) is the correct answer. Inventory valuation affects not only income statement, but also balance sheet. If capital

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expenditure is treated as revenue expenditure, it is an error of principle but not the error of commission. The sum total of assets is equal to the sum total of equity and outside liabilities but not the sum total of liabilities alone. Inventories should be valued at lower of historical cost and market value but not replacement cost. All these statements given in (a), (c), (d) and (e) are false. Therefore, alternative (b) is the correct answer. 30. Answer : (a) Reason : Conservatism concept means the early recognition of unfavorable events. Under this concept, the business must provide all expected losses but does not account for anticipated profit. In the given situation, provision for bad debt made out of profit for future bad debt loss is as per the conservative approach. Thus, alternative (a) is the correct answer. Cost concept implies that in accounting all transactions are generally recorded at cost and not at market value (b), Consistency concept states that all the accounting policies should be followed consistently from one accounting period to another, the Going concern concept (d) assumes that the business entity will continue to operate or an indefinite period of time and Time period concept (e) states that all the transactions pertaining to one accounting period should be accounted for and these four alternatives does not deal with provision for bad debts. Therefore, alternative (a) is the correct answer. 31. Answer : (d) Reason : Purchase of fixed assets on credit is entered in journal proper (d) and subsequently posted into the ledger. Hence (d) is the correct answer. It is not recorded in purchases book (a) as only purchase of goods will be recorded in purchases book. Ledger (b) is not original book of entry and therefore, is not the correct answer. In cash book (c), only cash transactions will be recorded. As the fixed assets were purchased on credit, this transaction will not be recorded in the cashbook. Alternative (e), which is the combination of one correct answer and one incorrect answer is also not the correct answer. Therefore, alternative (d) is the correct answer. 32. Answer : (a) Reason : The fundamental principle is that every transaction has dual aspect, an aspect of giving and an aspect of receiving. Under double entry system of accounting, both these aspects of receiving and giving are recorded in terms of account. Thus, the receiving and giving entries are being made in the business books, which are equal and opposite of one another because every debit has equal, and opposite credit. Hence alternative (a) is the correct answer. Alternative (b) is incorrect because double entry does not involve keeping two sets of books for the business. Alternative (c) is incorrect because business bookkeeping being kept by more than one person is not the principle of double entry system of accounting. Alternative (d) is incorrect because whether double entry or single entry business books may be checked twice. Double entry system of accounting does not involve in checking of the entries once or twice. Alternative (e) is incorrect because under double entry system of accounting if an entry is recorded once in the cash book it will not find its place in any other subsidiary book. If it is recorded in the journal it will not be recorded again in the cash book. Hence correct answer is (a). 33. Answer : (d) Reason : Current assets are the assets which can be converted into cash with in an accounting period i.e., usually twelve months. Stock (II), debtors (III), pre-paid expenses (III) and accrued income (IV) are current assets of a business and therefore alternative (d), which is the combination of the above four statements is the correct answer. Income received in advance is a liability of a business and is not a current asset. Therefore, alternative (d) is the correct answer. 34. Answer : (d) Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at premium. The amount so received is to be credited to securities premium account. 35. Answer : (c) Reason : The claims against the company not acknowledged as debts represent contingent liabilities and should be included in the notes to balance sheet. They are neither current liabilities (a) nor can be categorized under Loans and advances (b). it should not shown in Directors’ report (d). Alternative (e), i.e., no separate disclosure is required is also not a correct answer. Therefore, alternative (c) is the correct answer. 36. Answer : (b) Reason : The mistake made by recording the amount incorrectly, either wholly or partly is known as error of commission. Hence the correct answer is (b). If any transaction is omitted to be recorded, it is known as error of omission (a). If the principles of accounting are not followed in recording the transaction, it is known as error of principle (c). If two or more errors are made and the amount compensates in such a way that the error is not disclosed by trial balance, such errors are compensating errors (d). If any mistake is made in calculation (like the calculation of depreciation), such error is known as error of computation

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(e). thus alternatives (a), (c), (d) and (e) are not the correct answers. Therefore, alternative (b) is the correct answer. < TOP 37. Answer : (e) > Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be debited to general reserve account, capital reserve account, revaluation reserve account and capital redemption reserve account < TOP 38. Answer : (b) > Reason : Under cash basis of accounting, revenue is recognized when cash is received (b). Revenue is recognized under accrual basis when sale is made (a) or goods are delivered (c) or services are rendered (d) when there is reasonable certainty regarding the amount of consideration and is not under cash basis of accounting and therefore not the correct answers. Therefore, alternative (b) is the correct answer. < TOP 39. Answer : (c) > Reason : Number of years’ purchase is the factor with which the super profits will have to be multiplied in order to arrive at the value of goodwill.

Super profits

:

Average annual profits – (Average capital employed x Normal rate of

return)

Goodwill : Number of years’ purchase x super profits < TOP 40. Answer : (b) > Reason : The proposed dividend is classified as a provision (a) and shown on the liability side of the balance sheet. The dividend finally decided by the shareholders in the annual general meeting as payable is termed as Declared Dividend. Any dividend declared must be paid with thirty days from the date of declaration. Hence, a declared dividend must be classified as a current liability (b) in the balance sheet of the company. Thus the answer is (b). Declared dividend is not a reserve(c), not a current asset (d) and also not a miscellaneous expenditure (e). Therefore, alternative (b) is the correct answer. < TOP 41. Answer : (b) > Reason : 01.07.2003 400 × Rs.96 ex. interest 01.12.2003

Rs.38,400

300 × Rs.102 cum. Interest = Rs.30,600 – Rs.500 (Interest for 2 months 30,000 × 2 10 × 12 100 = Rs.500)

Rs.30,100

Rs.68,500 Amount debited to own debenture investment account is Rs.68,500. 42. Answer : (e) Reason : of shares) Particulars

(No. Anil

Vimal

Sunil

Total

30,000

40,000

30,000

1,00,000

4,800

6,400

4,800

16,000

25,200

33,600

25,200

84,000

22,000

24,000

28,000

74,000

3,200

9,600

(2,800)

10,000

Less: Division of Sunil’s surplus (in the ratio of 3:4)

1,200

1,600

2,800

–

Final liability of each underwriter

2,000

8,000

Nil

10,000

Liability Less: Unmarked applications in the ratio of 3:4:3 Less: Marked (Stamped) applications

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43. Answer : (c) Reason : Amount transferred to capital reserve is Rs.800. Working Note: Particulars Amount received on 300 shares that were cancelled 300 x Rs.5 = 1500 Amount received on 200 forfeited shares which were reissued (200 x Rs.5) Less: Amount of discount allowed on 200 shares which were reissued (200 x Re1.) Amount to be transferred to Capital Reserve

Rs. 1,000 200 800

Amount lying in share forfeiture account Rs.500 44. Answer : (a)

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 r    (M − S) Reason : Value of right =  N + r  Where

r N M S ∴

= = = =

No of rights issued No of old shares Market price Issue price of rights

Value of rights =

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45. Answer : (a) Reason :

Depreciation

Rs.1,85, 000 − Rs.5, 000 = Rs.18, 000 10 years =

The cost as on March 31, 2002 is irrelevant (cost concept). 46. Answer : (c) Reason : The impact on net profit: Salaries overstatement – net profit is reduced by Rs.15,000 Repairs understatement – net profit is increased by Rs.7,000 Income understatement – net profit is reduced by Rs.7,000 Net impact on net profit is understatement by Rs.15,000 47. Answer : (a) Reason : Bank Reconciliation Statement Particulars Favourable balance as per Pass book Add: Cheque deposited, yet to be realised

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Rs. 15,000

Rs. 20,000 15,000 35,000

Less: Cheques issued to Mr. Y but not presented for payment Rent deposited by Mr. Z directly into the bank Interest on debentures directly collected by bank Favourable balance as per cash book 48. Answer : (a) Reason :

Dr. Date March 31, 2004

4,000 10,000 10,000

24,000 11,000

Provision for Bad debts Account Particulars To

A

Rs. 12,000

Date April 01, 2003

Cr. Particulars

Rs.

By Opening balance

30,000

< TOP >

To

B

10,000

To To

C

7,000 Closing balance

March

31, By P & L a/c 2004

34,000

35,000 64,000

64,000 < TOP >

49. Answer : (e) Reason :

Rate of depreciation =

1–

n

S C

2

43,350 60, 000

=

1–

=

1 – 0.85 = 15%. < TOP >

50. Answer : (b) Reason : Particulars Total

Units

750 Purchases 150 Opening stock 900 750 Less Sales Closing stock 150 Since FIFO method of valuation is followed, the stock in hand will be that purchased on the latest date. i.e 26-03-2004. Hence closing stock

=

150 Units × Rs.40 per Unit = Rs.6,000 < TOP >

51. Answer : (a) Reason : Trading account and Profit and loss account for the year ended March 31, 2003. Dr. Particulars To Opening stock

Rs. 30,000

To Purchases

4,50,000

Less:

Returns 15,000 outward To Salaries and wages To Rent paid To Insurance To freight inward To Manager’s commission To depreciation To provision for bad debts To bad debts 52. Answer: Reason:

Particulars By Sales Less: Returns inward

Cr. Rs.

5,10,000 10,000

5,00,000

4,35,000 10,000 5,000 4,000 5,500 500 12,550 1,750 200 5,04,500

By Net loss

4,500

5,04,500

(b) Balance sheet of Krishnan as on March 31st, 2004 Liabilities

Rs.

Rs.

Assets

Rs.

Rs.

Capital Less net loss

2,00,000 4,500

Fixex assets Less depreciation 1,95,500 45,500

Sundry creditors

1,25,500 12,550 1,12,950 60,000

Land Sundry debtors Less provision Prepaid insurance Closing stock Cash in hand

2,41,000

35,000 1,750 33,250 1,000 10,000 23,800 2,41,000 < TOP >

53. Answer : (b) Reason : Particulars Original cost of furniture Less Depreciation at the rate of 20% Year – 1 Year – 2 Year – 3 Year – 4 Residual Value Useful life – 4 years

Rs. 5,000

1,000 4,000 800 3,200 640 2,560 512 2,048 < TOP >

54. Answer : (b) Reason : Particulars Cash Sales Issue of shares Amount received from bank by way of short-term loan Less: Purchase of fixed assets Short tem loan repaid Payment towards expenses Cash purchases Amount deposited in bank Cash balance as on March 31, 2004

Rs. 6,80,000 5,00,000 1,00,000 12,80,000 4,00,000 25,000 3,50,000 1,50,000 2,00,000 1,55,000

< TOP 55. Answer : (b) > Reason : Maximum underwriting commission Permissible under the companies Act, 1956 is 5% of issue price of shares. = 10,000 shares x Rs.115 X 5% = Rs.57,500.

< TOP >

56. Answer : (c) Reason : The correct entry which must have been recorded is Returns inward account Dr. Rs.7,850 To Prakash account Rs.7,850 Whereas, Prakash’s account is debited with Rs.7,850. Hence the rectification entry is Suspense account Dr. Rs.15,700 To Prakash account Rs.15,700 57. Answer : (d) Reason : Particulars Overdraft balance as per bank column of cash book Add: Cheques deposited not yet collected Bank and interest charges not recorded in cash book

< TOP >

Rs.

Rs. 3,400

6,300 910 7,210 10,610

Less: Cheques issued not yet presented for payment Interest directly collected by bank Credit balance as per pass book

5,650 5,200

10,850 240

58. Answer : (d) Reason : According to the basic accounting equation, assets = liabilities + owners equity. Hence owners equity = assets – liabilities. Capital = Rs.2,45,000 + Rs.1,85,000 + Rs.95,000 + Rs.80,000 – (Rs.1,20,000 + Rs.40,000) = Rs.6,05,000 – Rs.1,60,000 = Rs.4,45,000 Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003 = Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000 Alternatively, Liabilities Capital (balancing figure) Loan from bank Sundry Creditors

Rs. 4,45,000

Assets Fixed Assets

Rs. 2,45,000

1,20,000 40,000

Inventory Sundry Debtors Cash & Bank

1,85,000 95,000 80,000

6,05,000 6,05,000 Profit for the year 2003-2004 = Capital as on March 31, 2004 – Capital as on April 01, 2003 = Rs.4,45,000 – Rs.3,40,000 = Rs.1,05,000 59. Answer : (a) Reason : Trial balance as on March 31, 2004 Particulars Sales Purchases (balancing figure) Carriage inward Other expenses Fixed assets Sundry debtors

Dr. Amount (Rs) 2,21,000 28,000 31,000 10,90,000 1,25,000

Cr. Amount (Rs) 5,65,000

< TOP >

< TOP >

Sundry creditors Cash and bank Capital

95,000 65,000 15,60,000

9,00,000 15,60,000

Particulars By Sales By Closing stock

Rs. 5,65,000 50,000

Trading account for the year ended March 31, 2004 Particulars To Purchases To Carriage inward To Gross profit

Rs. 2,21,000 28,000 3,66,000 6,15,000

6,15,000 < TOP >

60. Answer : (b) Reason : Particulars Total of debit side of trial balance Add: Advertisement expenses Less: Opening stock (excess taken) Total of trial balance (Debit side)

Rs. 2,45,000 15,000 100 2,59,900

Particulars Total of credit side of trial balance Add: Interest on investments (less taken)

Rs. 2,68,900 6,000 2,74,900 15,000 2,59,900

Less: Advertisement expenses (wrongly taken) Total of trial balance (credit side)

< TOP >

61. Answer : (c) Reason : Particulars Petty cash Less: Stamps Conveyance Repairs Stationery Other office expenses

Amount (Rs.) 145 186 228 154 93

Amount (Rs.) 1,000

806 194 806 1,000

Amount reimbursed

62. Answer : (c) Reason : Since share money is called in full, the share capital account will be debited with Rs.50,000 i.e. No. of shares x Face value of share = 500 x Rs.100 = 50,000. 63. Answer : (b) Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr. Particulars

Rs.

Particulars

Rs.

< TOP >

< TOP >

To Opening stock To Purchases To Gross profit To Salaries To other expenses To Depreciation

90,000 By Sales 4,56,000 By closing stock 1,64,000 7,10,000 86,000 By Gross profit 73,000 By Net loss 75,000 2,34,000 Balance sheet as on March 31, 2004

Liabilities Share capital Sundry creditors Short tem loan

Rs. 6,00,000 32,000 36,000

Assets Fixed assets Sundry debtors Closing stock Cash and bank Net loss

6,68,000

6,35,000 75,000 7,10,000 1,64,000 70,000 2,34,000 Rs. 4,25,000 45,000 75,000 53,000 70,000 6,68,000

< TOP 64. Answer : (a) > Reason : Costs that improve the revenue earning capability of an asset should be capatilised as part of the cost of the asset (for example, Rs.40,000 paid for additional component for increasing the earning capacity). However, costs that maintain the revenue earning capability (such as the maintenance charges and the replacement parts) should be treated as revenue expenses and they are to be charged to the Profit and Loss Account. The correct figure for depreciation calculation is therefore, as under:

Particulars Cost less discount Delivery charges Erection charges Customs duty

Rs. 4,70,000 10,000 20,000 40,000

Rs.

5,40,000 < TOP >

65. Answer : (a) Reason : Trial Balance of John Vicky as at March 31, 2004 Sl.No

Heads of Account

1.

Capital (1st April, 2002) Drawings

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

(1st

April, 2002) Stock Purchases Sales Motor Vehicles Cash in Hand Sundry Creditors Sundry Debtors Bank Overdraft Administrative expenses Office Equipment Carriage Outward Returns Inward Provision for Bad Debts

Debt Balance (Rs.)

Credit Balance (Rs.) 89,000

10,000 37,000 2,31,250 3,94,000 14,500 1,350 49,760 139,700 9,000 76,360 35,000 2,310 2,050 4,250

16. 17. 18.

Returns Outward Discount Allowed Discount Received

3,160 2,800 3,150 5,52,320

5,52,320

TOTAL

< TOP >

66. Answer : (d) Reason :

Rs.4,38,000 + Rs.4,62,000 + 4,50,000 3

Average profit =

=

Rs.13,50,000 = Rs.4,50,000 3

Average profit Normal rate of return on capital employed 12% on Rs.35,00,000 Super profit

Rs.4,50,000 Rs.4,20,000 Rs. 30,000 < TOP >

67. Answer : (a) Reason : Debtors as per trail balance Less: Bad debts written-off

Rs.40,600 Rs. 600 Rs.40,000 Less: Provision for bad debts@ 5% Rs. 2,000 Rs.38,000

2 × Rs.38, 000 = Rs.760 Provision for discount on sundry debtors will be 100

68. Answer : (c) Reason :

Valuation of closing stock under Weighted Average Method Purchases

Date Mar. 2004 1

< TOP >

Quantity Opening Stock 500

Rate

Issues Value (Rs.)

Quantity

Rate

Balance Value (Rs.)

Quantity 1,000

Value (Rs.) 20 20,000

Rate

10 23 11,500 1,500 21 31,500 15 750 21 15,750 750 21 15,750 20 1,000 26.25 26,250 1,750 24 42,000 31 750 24 18,000 1,000 24 24,000 Value of closing stock 1,000 24,000 < TOP 69. Answer : (c) > Reason : Whenever trade discount is given, the same will not be separately disclosed and the sales will be shown at net figure. However, cash discount should be taken to discount account. Hence cash account should be debited with actual cash received (Rs.850), discount account should be debited with cash discount allowed (Rs.50) and sales should be credited with catalogue price less trade discount (i.e Rs.900). Cash a/c Dr. Rs.850 Discount a/c Dr. Rs. 50 To Sales a/c Rs. 900 < TOP 70. Answer : (a) > Reason : Book value of the machinery = Rs.5,00,000 Value of machinery on revaluation = 20% above book value Profit on revaluation = 20% of Rs.5,00,000 = Rs.1,00,000 Share of H. Ltd. = 80% of Rs.1,00,000 = Rs.80,000 (Capital profit)

If the value of assets of the subsidiary company are revalued at the time of acquisition of shares, profit or loss on such revaluation is treated as capital profit or capital loss and is divided among minority shareholders and holding company according to their share. There is no revenue profit in the instant problem. < TOP 71. Answer : (a) > Reason : If the proposed dividend exceeds 15% but less than 20%, the minimum percentage of current profits that will have to be transferred is 7.5% of current profits. Rs.2,25,000 x 7.5% = Rs.16,875. < TOP 72. Answer : (b) > Reason : Weighted average profit Rs.3,30,000 × 1 Rs.4,20,000 × 2 Rs.4,80,000 × 3 6

Year 1 Year 2 Year 3

∴ Weighted average profit = Rs.26,10,000 ÷ 6 = Rs.4,35,000 The alternative amounts of (a), (c), (d) and (e) are not correct. 73. Answer : (d) Reason :

Quick ratio =

Current assets other than inventories 3 + 5 = = 2.5. Current liabilities 3.2

Hence, option (d) is the correct choice.

< TOP OF THE DOCUMENT >

Rs. 3,30,000 Rs. 8,40,000 Rs.14,40,000 Rs.26,10,000

< TOP >